Difference Between FHA Loans And Conventional Loans
Many home buyers, especially first time home buyers, who are shopping for mortgage loans often wonder the difference between FHA Loans and Conventional Loans. There are big differences between FHA Loans and Conventional Loans and some home buyers may qualify for a FHA Loan and not a Conventional Loan while others may qualify for a Conventional Loan but not FHA Loan. Many folks believe that FHA Loans are for poor credit mortgage loan borrowers and that Conventional Loans are for prime credit borrowers. This is absolutely not the case and I will explain in this blog why sometimes FHA Loans are better options and other times Conventional Loans is the only route to take.
FHA Loans is the most popular residential mortgage loan program in the United States today. FHA stands for the Federal Housing Administration which is a subsidiary of the United States Department of Housing and Urban Development, which is know by many as HUD. FHA is not a mortgage company and FHA does not originate, process, underwrite, fund, or service any residential mortgage loans. The function of the Federal Housing Administration is to insure mortgage loans that is originated and funded by private banks and mortgage companies that are FHA approved mortgage lenders. FHA approved mortgage lenders need to follow FHA lending guidelines in order for the FHA Loans they originate and fund to be insurable by FHA in the event the FHA mortgage loan borrower defaults on their FHA Loan. FHA Loans have lower interest rates that conventional loans because FHA guarantees the FHA Loan in the event of borrower’s default of the loan. However, FHA does have both an upfront mortgage insurance premium as well as an annual mortgage insurance premium. The FHA mortgage insurance premium goes to a pool where it is used to fund bad FHA Loans. Minimum down payment required for FHA Loans is 3.5% and minimum credit scores required to qualify for a FHA Loan is 580 FICO if the home buyer has a 3.5% down payment. FHA mortgage loan borrowers can qualify for FHA Loan with credit scores under 580 FICO, however, FHA requires a 10% down payment on a home purchase for FHA mortgage loan borrowers with credit scores under 580 FICO. Maximum debt to income ratios allowed on FHA Loans is 56.9% back end debt to income ratios, however, you need a credit score of at least 620 FICO. For mortgage loan borrowers with credit scores of under 620 FICO, maximum debt to income ratios allowed is capped at 43% debt to income ratios. FHA Loans is for owner occupant properties only and second home financing and investment home financing is not available with FHA Loans. You can qualify to purchase one to four unit owner occupant properties with FHA Loans. You can purchase a condominium with FHA Loans, however, the condo complex needs to be FHA approved.
Conventional Loans have stricter lending guidelines than FHA Loans. Conventional Loans are called conforming loans because they need to conform to Fannie Mae or Freddie Mac Lending guidelines. Fannie Mae and Freddie Mac are the two government sponsored mortgage giants that set conventional lending guidelines. To qualify for a conventional loan, minimum credit scores required is 620 FICO versus FHA’s 580 FICO requirements. Maximum debt to income ratios on conventional loans is 45% unlike FHA’s 56.9% maximum back end debt to income ratio caps. Conventional Loans are available for one to four unit owner occupant properties, second homes, and investment homes. Minimum down payment required for conventional loans is 3% for first time home buyers or home buyers who did not own a home for at least three years or 5% for seasoned home buyers. Private mortgage insurance is not required if you have at least 20% down payment. Conventional Loans on second home financing require 10% down payment and 15% down payment is required on investment home financing.
Two To Four Unit Properties
FHA Loans require 3.5% down payment on any one to four unit properties. However, with conventional loans, 15% down payment is required on two to four unit properties, even though it is owner occupied. If you are a home buyer that needs a FHA Lender or Conventional Lender with no lender overlays, please contact us at Gustan Cho Associates at 262-878-1965. We are available 7 days a week including evenings.